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SECURITIES & EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

ý Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2003.

OR

o Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Transition period from _______________ to _______________.

Commission File Number

0-14714

Astec Industries, Inc.

(Exact Name of Registrant as Specified in its Charter)

Tennessee

62-0873631

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

4101 Jerome Avenue, Chattanooga, Tennessee

37407

(Address of Principal Executive Offices)

(Zip Code)

(423) 867-4210
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý

NO o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES ý

NO o

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Class

Outstanding at May 12, 2003

Common Stock, par value $0.20

19,678,998

 

ASTEC INDUSTRIES, INC.

 

INDEX

 

Page Number

PART I - Financial Information

 

Item 1. Financial Statements

 

Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002

1

Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002

2

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002

3

Notes to Unaudited Consolidated Financial Statements

4

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

8

Item 3. Quantitative and Qualitative Disclosures about Market Risk

17

Item 4. Controls and Procedures

18

PART II - Other Information

 

Item 1. Legal Proceedings

18

Item 3. Defaults Upon Senior Securities

18

Item 6. Exhibits and Reports on Form 8-K

18

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Astec Industries, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)

Account Description

March 31,

2003

(Unaudited)

December 31,

2002

(Note 1)

ASSETS

Current Assets

Cash and cash equivalents

$ 44,490

$ 30,341

Receivables - net

76,280

76,449

Inventories

114,554

120,238

Prepaid expenses and other

19,487

22,847

Total current assets

254,811

249,875

Property and equipment - net

123,357

125,799

Goodwill

36,093

36,093

Other assets

4,190

4,736

Total assets

$418,451

$416,503

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Notes payable and current maturities of long-term debt

$ 1,489

$ 3,220

Accounts payable - trade

41,436

33,680

Accrued product warranty

3,715

3,646

Other accrued liabilities

37,616

36,105

Total current liabilities

84,256

76,651

Long-term debt, less current maturities

130,141

130,645

Other non-current liabilities

10,772

15,315

Minority interest in consolidated subsidiary

521

460

Total shareholders' equity

192,761

193,432

Total liabilities and shareholders' equity

$418,451

$416,503

 

 

 

 

Astec Industries, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands)

(Unaudited)

Three Months Ended

March 31,

2003

2002

Net sales

$ 122,128

$122,442

Cost of sales

101,521

94,566

Gross profit

20,607

27,876

Selling, general, administrative and engineering expenses

21,410

19,578

Income (loss) from operations

(803)

8,298

Interest expense

(2,341)

(2,223)

Other income, net of expense

182

675

Income (loss) before income taxes

(2,962)

6,750

Income taxes (benefit)

(1,153)

2,097

Minority interest in earnings

21

18

Net income (loss)

$ (1,830)

$ 4,635

Earnings (loss) per common share

Basic

$ (0.09)

$ 0.24

Diluted

$ (0.09)

$ 0.23

Weighted average common shares outstanding

Basic

19,677,734

19,617,025

Diluted

19,677,734

19,854,430

 

 

Astec Industries, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Three months ended March 31,

2003

2002

Cash flows from operating activities:

Net income (loss)

$(1,830)

$ 4,635

Adjustments to reconcile net income (loss) to net cash provided by

operating activities:

Depreciation and amortization

3,424

3,272

Provision for doubtful accounts

120

212

Provision for inventory reserve

1,490

296

Provision for warranty reserve

2,016

2,154

Gain on sale and disposition of fixed assets

(22)

(251)

Gain on sale of lease portfolio

-

(88)

Minority interest in earnings of subsidiary

60

18

(Increase) decrease in:

Trade receivables

(14,109)

(23,757)

Finance receivables

735

688

Inventories

4,193

(9,438)

Prepaid expenses and other

3,362

4,335

Other non-current assets

(1,500)

(8,822)

Increase (decrease) in:

Accounts payable

7,756

11,624

Accrued product warranty

(1,947)

(1,796)

Other accrued liabilities

(1,124)

2,281

Income taxes payable

-

(901)

Other operating charges

(1,012)

61

Net cash provided (used) by operating activities

1,612

(15,477)

Cash flows from investing activities:

Proceeds from sale of property and equipment - net

45

368

Proceeds from sale and repayment of lease portfolio

16,203

3,874

Expenditures for property and equipment

(1,740)

(2,617)

Expenditures for equipment on operating lease

-

(3,874)

Net cash provided (used) by investing activities

14,508

(2,249)

Cash flows from financing activities:

Net repayments under revolving credit agreement

-

17,722

Net repayments under loan and note agreements

(2,234)

(664)

Proceeds from issuance of common stock

-

183

Net cash provided (used) by financing activities

(2,234)

17,241

Effect of exchange rate changes on cash

263

(235)

Net increase in cash and cash equivalents

14,149

(720)

Cash and cash equivalents at beginning of period

30,341

6,670

Cash and cash equivalents at end of period

$ 44,490

$ 5,950

ASTEC INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.

The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Certain reclassifications were made to the prior year presentation to conform to the current year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Astec Industries, Inc. and subsidiaries annual report on Form 10-K for the year ended December 31, 2002.

Note 2. Receivables

Receivables are net of allowance for doubtful accounts of $2,643,000 and $2,775,000 for March 31, 2003 and December 31, 2002, respectively.

Note 3. Inventories

Inventories are stated at the lower of first-in, first-out cost or market and consist of the following:

 

 

(in thousands)

 

March 31, 2003

December 31, 2002

Raw Materials

$52,261

$ 47,938

Work-in-Process

21,519

20,606

Finished Goods and Used Equipment

40,774

51,694

Total

$114,554

$120,238

Note 4. Property and Equipment

Property and equipment is stated at cost. Property and equipment is net of accumulated depreciation of $82,101,000 and $80,791,000 for March 31, 2003 and December 31, 2002, respectively.

Note 5. Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with SFAS No. 128. Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities.

The following table sets forth the computation of basic and diluted earnings (loss) per share:

 

Three Months Ended March 31,

 

2003

2002

Numerator:

 

 

Net income (loss)

$(1,830,000)

$4,635,000

Denominator:

 

 

Denominator for basic earnings per share

19,677,734

19,617,025

Effect of dilutive securities:

 

 

Employee stock options

0

237,405

Denominator for diluted earnings per share

19,677,734

19,854,430

Earnings (loss) per common share:
Basic
Diluted


$ (0.09)
$ (0.09)


$ 0.24
$ 0.23

 

Notes to Unaudited Financial Statements - Continued

Note 6. Comprehensive Income

Total comprehensive income for the three-month period ended March 31, 2003 was a loss of $671,000 and comprehensive income for the three-month period ended March 31, 2002 was $4,844,000.

The components of comprehensive income or loss for the periods indicated are set forth below:

 

(in thousands)

 

Three months ended
March 31,

 

2003

2002

Net income (loss)

$(1,830)

$ 4,635

Net increase in accumulated fair value
of derivative financial instruments

43

61

Increase (decrease) in foreign currency translation adjustments

1,116

148

Total comprehensive income (loss)

$ (671)

$ 4,844

Note 7. Contingent Matters

Certain customers have financed purchases of Astec products through arrangements in which the Company is contingently liable for customer debt of approximately $13,085,000 and for residual value guarantees aggregating approximately $1,305,000 at March 31, 2003 and contingently liable for customer debt of approximately $14,749,000 at December 31, 2002.

Management has reviewed all claims and lawsuits and, upon the advice of counsel, has made adequate provision for any estimable losses. However, the Company is unable to predict the ultimate outcome of the outstanding claims and lawsuits.

Note 8. Segment Information

 

(in thousands)

 

Three months ended

 

March 31, 2003

Asphalt
Group

Aggregate
and Mining
Group

Mobile Asphalt
Paving
Group

Underground
Group

All
Others

Total

Revenues from external customers

$44,322

$44,313

$20,456

$12,506

$531

$122,128

Intersegment revenues

2,120

3,268

441

-

1,191

7,020

Gross profit

6,576

9,544

4,291

(30)

226

20,607

Gross profit percent

14.8%

21.5%

21.0%

(0.2%)

42.6%

16.9%

Segment profit

$2,083

$1,773

$1,187

$(3,034)

$(3,817)

$(1,808)

 

 

 

Three months ended

 

March 31, 2002

 

Asphalt
Group

Aggregate
and Mining
Group

Mobile Asphalt
Paving
Group

Underground
Group

All
Others

Total

Revenues from external customers

$50,114

$42,054

$17,657

$11,592

$1,025

$122,442

Intersegment revenues

4,376

4,440

(133)

-

939

9,622

Gross profit

9,414

10,403

4,942

2,811

306

27,876

Gross profit percent

18.8%

24.7%

28.0%

24.2%

29.8%

22.8%

Segment profit

$5,089

$2,644

$2,046

$768

$(5,547)

$5,000

 

Notes to Unaudited Financial Statements - Continued

Reconciliations of the reportable segment totals for profit or loss to the Company's consolidated totals are as follows:

 

(In thousands)

 

Three months ended March 31,

Profit:

2003

2002

Total profit for reportable segments

$2,009

$10,547

Other profit (loss)

(3,817)

(5,547)

Minority interest in earnings

(21)

(18)

Elimination of intersegment (profit) loss

(1)

(347)

Total consolidated net income (loss)

$(1,830)

$4,635

Note 9. Legal Matters

There have been no material developments in legal proceedings previously reported. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies" in Part I - Item 2 of this Report.

Note 10. Seasonality

Approximately 20% to 25% of the Company's business volume typically occur during the first three months of the year. During the usual seasonal trend, the first three quarters of the year are the Company's stronger quarters for business volume, with the fourth quarter normally being the weakest quarter.

Note 11. Financial Instruments

Effective January 1, 2001, the Company adopted SFAS No. 133, which requires the Company to recognize derivative instruments on the balance sheet at fair value. The statement also establishes new accounting rules for hedging instruments, which depend on the nature of the hedge relationship. The Company has a cash flow hedge, which requires that the effective portion of the change in the fair value of the derivative instrument be recognized in Other Comprehensive Income (OCI), a component of Shareholders' Equity, and reclassified into earnings in the same period, or periods during which the hedged transaction affects earnings. The ineffective portion of the hedge, if any, is recognized in current operating earnings during the period of change in fair value.

The Company's captive finance subsidiary, Astec Financial Services, Inc. ("AFS"), entered into an interest rate swap agreement on April 6, 2000, to fix interest rates on variable rate debt. The swap agreement is effective for five years with a notional amount of $7,500,000. The objective of the hedge is to offset the variability of cash flows relating to the interest payments on the variable rate debt outstanding under the Company's revolving credit facility. The sole source of the variability in the hedged cash flows results from changes in the benchmark market interest rate, which is three-month U.S. Dollar LIBOR. Changes in the cash flows of the interest rate swap are expected to be highly effective at offsetting the changes in overall cash flows (i.e., changes in interest rate payments) attributable to fluctuations in the benchmark market interest rate on the variable rate debt being hedged.

During the three-month period ended March 31, 2003, there was no material ineffectiveness related to the Company's derivative holdings and there was no component of the derivative instruments' gains or losses excluded from the assessment of hedge effectiveness.

Note 12. Goodwill

Goodwill represents the excess of cost over the fair value of net identifiable assets acquired. Goodwill amounts were amortized using the straight-line method over 20 years through 2001. Effective January 1, 2002, goodwill is no longer being amortized in accordance with Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets," but is tested for impairment at least annually. The Company measures goodwill impairment by comparing the carrying value of its operating units, including goodwill, with the fair value of the operating unit measured by determining the present value of future cash flows. Significant declines in estimated future cash flows could indicate potential impairment and trigger an impairment assessment. The

Notes to Unaudited Financial Statements - Continued

Company completed the required impairment tests of goodwill during the first quarter of 2003 and noted no impairment of goodwill. At March 31, 2003 and December 31, 2002, the Company had unamortized goodwill in the amount of $36,093,000. Accumulated goodwill amortization was approximately $7,258,000 at March 31, 2003 and December 31, 2002.

Note 13. Long-term Debt

On September 10, 2001, the Company and Astec Financial Services entered into a $125,000,000 revolving credit facility with a syndicate of banks that expires on September 10, 2004 and an $80,000,000 note purchase agreement for senior secured notes, placed with private institutions. The Company did not meet certain financial covenants under the revolving credit facility and note agreement for each of the four quarters during 2002. The Company obtained waivers and amendments for each of these violations which ultimately resulted in the Company granting a security interest in its inventory, machinery and equipment, and trade receivables to the banks and note holders, and reducing the maximum commitment available under the credit facility to $58,200,000. Approximately $21,300,000 of the revolving credit facility at December 31, 2002 was supporting outstanding letters of credit, primarily for industrial development revenue bonds. Advances to Astec Financial under the credit facility are limi ted to eligible receivables as defined in the agreement.

Amounts outstanding under the credit facility bear interest, at the Company's option, at a rate from prime to prime plus .875% or from 1.0% to 1.875% above the London Interbank Offering Rate. The interest rate applied to borrowings is based on a leverage ratio, calculated quarterly, as defined by the credit agreement. As a result of covenant violations during 2002, the Company pays interest rate surcharges from .375% to 1.375% above the rates in the credit agreement and senior secured note agreement. Both the credit agreement and the senior secured note agreement contain certain restrictive covenants relative to operating ratios and capital expenditures and also restrict the payment of dividends.

The Company was not in compliance with certain covenants of its revolving credit facility and the senior note agreement as of March 31, 2003. On March 31, 2003 the Company entered into an amendment to the credit facility and note purchase agreement, which waived the violations of the financial covenants as of March 31, 2003. The amendment increased the maximum commitment available under the amended credit facility to $60,700,000; amended the financial ratio covenants prospectively; added additional operating ratio covenants; requires the funding of a collateral account; restricts the aggregate amount of recourse obligations; prohibits the Company from making additional loans to its customers for the purchase of equipment or entering into equipment leases with its customers; and granted additional security interests in all of the Company's real and intellectual property and any other asset of the Company with a book value greater than $500,000. Under the terms of the note purchase agreement , if the Company repays the senior note before September 10, 2011, it will incur pre-payment fees. Management believes the Company will remain in compliance with the amended covenants under the credit facility and the senior secured notes throughout 2003.

Note 14. Stock-based Compensation

The following pro forma summary presents the Company's net income (loss) and per share earnings (loss) which would have been reported had the Company determined stock compensation cost using the fair value method of accounting set forth under SFAS 123. There is no stock-based employee compensation cost in net income (loss) as reported. The pro forma impact on net income (loss) shown below may not be representative of future effects.

 

 

Three months ended March 31,

 

2003

2002

Net income (loss), as reported

$(1,830,000)

$4,635,000

Stock compensation expense under SFAS 123, net of taxes

(14,000)

(471,000)

Adjusted net income (loss)

$(1,844,000)

$4,164,000

 

 

 

Basic earnings (loss) per share, as reported

$ (0.09)

$ 0.24

Stock compensation expense under SFAS 123, net of taxes

-

(0.02)

Adjusted basic earnings (loss) per share

$ (0.09)

$ 0.22

 

 

 

Diluted earnings (loss) per share, as reported

$ (0.09)

$ 0.23

Stock compensation expense under SFAS 123, net of taxes

-

(0.02)

Adjusted diluted earnings (loss) per share

$ (0.09)

$ 0.21

Note 15. Product Warranty Reserves

Changes in the Company's product warranty liability during the quarter ended March 31, 2003 are as follows:

Reserve balance at beginning of period

$3,646,000

Warranty liabilities accrued during the period

1,490,000

Warranty liabilities settled during the period

(1,421,000)

Reserve balance at the end of the period

$3,715,000

The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The warrant liability is primarily based on historical claim rates, nature of claims and the associated cost.

Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations

When used in this report, press releases and elsewhere by management or the Company from time to time, the words, "believes," "anticipates," and "expects" and similar expressions are intended to identify forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that involve certain risks and uncertainties. Statements in this Form 10-Q that are forward looking include, without limitation, statements regarding the Company's expected increase in net income in the current year, the impact on domestic sales by the general economic slowdown and continued delays in capital expenditures, expected sales during 2003, the Company's expected effective tax rates for 2003, the Company's expected capital expenditures in 2003, the expected benefit of financing arrangements, and the ability of the Company to meet its working capital and capital expenditure requirements through March 31, 2004. A variety of factors could cause actual results to differ materially from those anticipated in the Company's forward-looking statements, which include the risk factors that are discussed from time to time herein and in the Company's reports filed with the SEC, most recently in the Company's Annual Report on Form 10-K for the period ended December 31, 2002. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. The Company undertakes no obligations to update the forward-looking statements.

Results of Operations

For the three months ended March 31, 2003, net sales decreased $314,000, or less than 1%, to $122,128,000 from $122,442,000 for the three months ended March 31, 2002. Sales are generated primarily from equipment purchases made by customers for use in construction for privately funded infrastructure development and public sector spending on infrastructure development. Although the sales volume for the first quarter of 2003 was basically flat compared to the same quarter of 2002, the product mix was much different during the current quarter compared to 2002. While Asphalt Group sales decreased approximately $5,800,000 for the first quarter of 2003 compared to the first quarter of 2002, net sales for the remaining operating segments increased over the prior year quarter. The change in product mix which helped offset the decrease in Asphalt Group sales for the first quarter of 2003 was due mainly to increased used equipment sales volume and sales from the Underground Group's Case small trencher product line of which initial shipments were made during the first quarter of 2003.

International sales for the first quarter of 2003 increased $4,873,000, or 26.0%, to $23,630,000, compared to $18,757,000 for the first quarter of 2002. For the three months ended March 31, 2003 and 2002, international sales accounted for approximately 19.3% and 15.3% of net sales, respectively. Sales in Europe and Africa account for the increase in international sales for the first quarter of 2003 compared to the same quarter of 2002. The Company is unable to determine whether or not the increase in international sales volume will be a trend or if the market as a whole experienced it. From discussions with many of the Company's customers, the Company expects continued slow sales volume through 2003.

Gross profit for the three months ended March 31, 2003 decreased $7,269,000, or 26.0%, to $20,607,000 from $27,876,000 for the three months ended March 31, 2002. For the first quarter of 2003, a significant portion of the decrease in gross margin resulted from under-utilization of production capacity by the Underground Group. The Underground Group is still implementing and developing the processes necessary for its production of the Case product line of small trenchers. Also related to under-utilization, the Underground Group did not begin production on the large models of Trencor trenchers in Loudon, Tennessee until mid-March. The gross margin for the first quarter of 2003 was also negatively affected by used equipment sales with little or no gross profit margin. During the first quarter of 2003 all operating segments continued to experience significant pricing pressure and limited market opportunities. The gross margin as a percentage of sales for the quarter ended March 31, 2003 decreas ed to 16.9% compared to 22.8% during the same prior year quarter.

Selling, general, administrative and engineering expenses for the three months ended March 31, 2003 were $21,410,000 or 17.5% of net sales, compared to $19,578,000 or 16.0% of net sales for the three months ended March 31, 2002, an increase of $1,832,000 or 9.4%. The increase in selling, general, administrative and engineering expenses for the first quarter of 2003, compared to the same period of 2002, related primarily to real estate title and recording fees and legal and consulting fees required by the current lenders. In addition, selling, general, administrative and engineering expense for the quarter ended March 31, 2003 included an increase of $300,000 of advertising costs related to amortization of direct response advertising.

Interest expense increased $118,000, or 5.3%, to $2,341,000 for the quarter ended March 31, 2003 from $2,223,000 for the quarter ended March 31, 2002. Interest expense as a percentage of net sales was approximately 1.9% and 1.8% for the quarters ended March 31, 2003 and 2002, respectively. The Company continues to incur interest rate surcharges under the current credit facilities for prior non-compliance with certain financial ratios, which were waived by amendments.

Other income, net of other expense, was $182,000 for the quarter ended March 31, 2003, compared to $675,000 for the quarter ended March 31, 2002, a decrease of $493,000. The decrease in other income, net of other expense, relates primarily to the absence of gain on the sale of lease portfolios by Astec Financial Services during the first quarter of 2003 compared to the first quarter of 2002. The Company exited the equipment-financing business effective December 31, 2002, and although currently in negotiations, has not yet sold its remaining portfolio of leases.

For the three months ended March 31, 2003, the Company recorded an income tax benefit of $1,153,000, compared to an income tax expense of $2,097,000 for the three months ended March 31, 2002. The consolidated effective tax rate includes foreign tax expense for South Africa at an effective tax rate of approximately 33%. The Company expects the effective tax rate for 2003 to be comparable to historical effective rates.

For the three months ended March 31, 2003 the Company had a net loss of $1,830,000 compared to net income of $4,635,000 for the three months ended March 31, 2002. Net loss per share for the three months ended March 31, 2003 was $.09 per share and earnings per share for the three months ended March 31, 2002 was $0.23 per diluted share, based on 19.7 million and 19.8 million weighted average shares outstanding, respectively.

Backlog of orders at March 31, 2003 was $53,289,000, compared to $74,684,000 at March 31, 2002, a decrease of $21,395,000 or 28.6%. The decrease in the backlog of orders at March 31, 2003 compared to March 31, 2002 relates primarily to decreased domestic backlog of approximately $13,600,000 for equipment of the Company's Aggregate and Mining Group. Compared to that of March 31, 2002, the backlog of orders as of March 31, 2003 decreased by $9,300,000 for the Asphalt Group, decreased by $6,000,000 for the Mobile Asphalt Paving Group and increased $2,100,000 for the Underground Group. The Company is unable to determine whether this backlog effect was experienced by the industry as a whole.

Liquidity and Capital Resources

Total short-term borrowings, including current maturities of long-term debt, were $1,489,000 at March 31, 2003, compared to $3,220,000 at December 31, 2002. A financing agreement for imported, purchased inventory items accounted for $167,000 and $886,000 of the short-term borrowings at March 31, 2003 and December 31, 2002, while outstanding Industrial Development Revenue Bonds accounted for $500,000 of the current maturities of long-term debt at March 31, 2003 and December 31, 2002. Net cash provided by operating activities for the three months ended March 31, 2003 was $1,612,000 compared to net cash used by operating activities of $15,477,000 for the three months ended March 31, 2002. The increase in cash provided by operating activities is primarily due to decreases in inventory and finance receivables during the first quarter of 2003, and compared to the same period of 2002, a smaller offsetting increase in trade receivables.

Long-term debt, less current maturities, decreased to $130,141,000 at March 31, 2003 from $130,645,000 at December 31, 2002. At March 31, 2003, $80,000,000 was outstanding under the Note Purchase Agreement, $31,902,000 was outstanding under the revolving credit facility and $19,200,000 was outstanding under the long-term principal portion of Industrial Revenue Bonds.

On September 10, 2001, the Company entered into an unsecured $125,000,000 revolving loan agreement with a syndicate of banks, which expires on September 10, 2004. At December 31, 2002, the Company was utilizing $31,902,000 of the amount available under the credit facility for borrowing and an additional $19,200,000 to support outstanding letters of credit (primarily for industrial revenue bonds). At the time of entering into the credit facility, Astec Industries, Inc. was able to borrow up to $105,000,000 while Astec Financial Services, Inc., the Company's captive finance company, was able to borrow up to $50,000,000, with the total borrowing by both companies limited to $125,000,000. Advances to Astec Financial Services, Inc. under this line of credit were limited to "Eligible Receivables" of Astec Financial Services, Inc. as defined in the credit agreement that governs the credit facility.

Principal covenants under the loan agreement include (i) the maintenance of minimum levels of net worth, leverage and fixed charge coverage ratios, (ii) a limitation on capital expenditures and rental expense, (iii) a prohibition against the payment of dividends and (iv) a prohibition on large acquisitions except upon the consent of the lenders. There is a provision in the loan agreement allowing the borrowing of $10,000,000 from any source for needs beyond the revolver provisions.

As of December 31, 2001, the Company was not in compliance with two financial ratio covenants contained in its credit facility. These covenant violations were waived by a required majority of the members of the Company's banking syndicate effective December 31, 2001. On March 12, 2002, the Company executed the first amendment to the credit facility, which decreased the maximum amount available from $125,000,000 to $100,000,000, relaxed certain financial ratio covenants for 2002, provided security for the lenders in certain situations, and added a .375% interest rate surcharge, and waived the violations of financial ratios under the original agreement. A second amendment to the credit agreement, dated May 13, 2002, waived non-compliance of the financial covenants for the quarter ended March 31, 2002 and amended the leverage ratio sliding scale on which interest and various fee rates are determined. Borrowings under the credit facility, as amended by the second amendment to the credit agreem ent, bear interest at a rate equal to the London Interbank Offering Rate ("LIBOR") plus from 1.0% to 3.25%, depending on the leverage ratio as defined by the credit agreement and applied to the sliding scale. On August 7, 2002, the Company entered into a third amendment to the credit agreement. The third amendment waived non-compliance with the leverage and fixed charge coverage ratio covenants as of June 30, 2002.

At September 30, 2002 the Company and Astec Financial Services were not in compliance with the leverage and fixed charge coverage ratio covenants of the amended revolving credit facility. On October 24, 2002, the Company and Astec Financial Services entered into a forbearance agreement with its lenders under the credit agreement and Bank One, NA, as agent under the credit agreement. Under the forbearance agreement, among other things, (i) the total commitment available to the Company and Astec Financial Services under the credit agreement was reduced from $100,000,000 to $75,000,000 and (ii) the Company was prohibited from making any acquisitions, other than specified acquisitions pursuant to agreements to which the Company had already entered. On November 14, 2002, the Company entered into the fourth amendment to the credit facility, which waived the violations of financial ratios for the quarter ended September 30, 2002; decreased the maximum commitment available from $75,000,000 to $58, 200,000; relaxed through June 30, 2003 the two financial ratio covenants that were breached as of September 30, 2002; added a minimum earnings before interest expense, income tax expense, depreciation, and amortization covenant for the fourth quarter of 2002; provided additional security to the lenders in the form of real estate mortgages on certain of the Company's property; limited the amount of additional funds available for working capital purposes to $5,000,000 above the approximately $53,200,000 that was outstanding under the credit facility as of November 13, 2002; allowed the lenders to receive $19,200,000 from the sale of the Trencor facility (a sale which did not transpire) to pay off the $8,000,000 letter of credit that will be used to retire the industrial revenue bonds on the Trencor facility and to repay $11.2 million of debt that was advanced by the lenders to purchase the John Deere facility; required proceeds from sales of lease portfolio assets to be used to repay the outstanding amounts un der the credit facility; and reduced the aggregate commitment under the credit facility going forward by the amount of proceeds received by the Company for sales of assets.

At March 31, 2003, the Company was not in compliance with the leverage and fixed charge coverage ratios of the amended credit facility. On March 31, 2003, the Company entered into a fifth amendment to the credit facility, which waived the violations of financial ratios covenants for the quarter ended March 31, 2003; increased the maximum commitment available under the amended credit facility to $60,700,000, amended the two financial ratio covenants with which the Company was not in compliance as of December 31, 2002; added a minimum consolidated net revenue covenant on a rolling four-month basis; added a minimum earnings before interest expense, income tax expense, depreciation, and amortization covenant on a rolling four-month basis; requires the funding of a $23,720,00 collateral account by May 31, 2003 with the amount of the collateral account increasing each month until its reaches $52,230,000 by December 31, 2003; restricts the aggregate amount of recourse obligations to $13,500,000; limits fixed asset expenditures; prohibits the Company from making loans to its customers for the purchase of equipment or entering into to equipment leases with its customers; and granted additional security interests in all of the Company's real and intellectual property and any other asset of the Company with a book value greater than $500,000.

The Company intends to enter into a new credit facility in order to refinance the obligations under the existing credit agreement and the senior note and is currently in active negotiations with potential lenders regarding such a facility.

In the event the Company does not enter into a new credit facility, management believes the Company will remain in compliance with the amended covenants during 2003, however, no assurances can be provided that financial ratio covenant violations of the amended credit agreement will not occur in the future or, if such violations occur, that the members of the Company's banking syndicate will not elect to pursue their contractual remedies under the amended credit agreement, including requiring the immediate repayment in full of all amounts outstanding. There can also be no assurance that the Company can secure adequate or timely replacement financing to repay its banking syndicate in the event of an unanticipated repayment demand.

The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd., has available a credit facility of approximately $1,750,000 to finance short-term working capital needs and an additional $1,750,000 available to cover the short-term establishment of letter of credit performance guarantees. As of March 31, 2003, Osborn Engineered Products had no outstanding cash balance due under the credit facility, but had approximately $864,000 in performance and retention bonds guaranteed under the facility.

On September 10, 2001, the Company and Astec Financial Services, Inc., entered into a note purchase agreement for $80,000,000 of senior secured notes, placed with private institutions, due September 10, 2011 at a fixed rate of interest of 7.56%. On September 10, 2005 and on each September 10 thereafter, the Company must make a principal payment of $11,428,571. Interest will be due and payable semiannually on each March 10 and September 10. If the Company repays the senior secured note before September 10, 2011, it will incur additional pre-payments fees. As part of this agreement, the Company must maintain certain net worth and fixed charge coverage ratios.

On March 12, 2002, the Company executed the first amendment to the note purchase agreement to relax certain financial ratio covenants for 2002 and to provide additional security for the note holders in certain situations. The first amendment to the note purchase agreement also added a 0.375% interest rate surcharge and waived the violations of financial ratios under the original agreement. The second amendment to the note purchase agreement, executed May 13, 2002 and effective April 1, 2002, waived the financial covenant violations as of March 31, 2002. It also included a .375% to 1.375% interest rate surcharge applied on a sliding scale based on the covenant calculation each quarter if the original covenant ratios are not met. At June 30, 2002, the Company was not in compliance with the leverage and fixed charge coverage covenants of the senior note agreement. These covenant violations were waived by a majority of the note holders as part of the third amendment to the note purchase agreem ent dated August 14, 2002. The rate at which the senior subordinated note indebtedness accrues interest did not change from that stated in the second amendment. On November 14, 2002, the Company entered into the fourth amendment to the note purchase agreement, which relaxed through June 30, 2002 the two financial ratio covenants that were breached as of September 30, 2002; added a minimum earnings before interest expense, income tax expense, depreciation, and amortization covenant for the fourth quarter of 2002; provided additional security to the lenders in the form of real estate mortgages on certain of the Company's property; and waived the violations of financial ratios for the quarter ended September 30, 2002.

At March 31, 2003, the Company was not in compliance with the consolidated total debt coverage covenant and the fixed charge coverage covenant of the note purchase agreements. On March 31, 2003, the Company entered into a fifth amendment to the note purchase agreement, which waived the violations of financial ratios covenants for the quarter ended December 31, 2002; amended the two financial ratio covenants with which the Company was not in compliance as of December 31, 2002; added a minimum consolidated net revenue covenant on a rolling four-month basis; added a minimum earnings before interest expense, income tax expense, depreciation, and amortization covenant on a rolling four-month basis; requires the funding of a $23,720,00 collateral account by May 31, 2003 with the amount of the collateral account increasing each month until its reaches $52,230,000 by December 31, 2003; restricts the aggregate amount of recourse obligations to $13,500,000; limits fixed asset expenditures; prohibits the Company from making loans to its customers for the purchase of equipment or entering into to equipment leases with its customers; and granted additional security interests in all of the Company's real and intellectual property and any other asset of the Company with a book value greater than $500,000.

The Company intends to enter into a new credit facility in order to refinance the obligations under the senior secured note and the existing credit agreement and is currently in active negotiations with potential lenders regarding such a facility. If the Company repays the senior secured note before September 10, 2011, it will incur additional pre-payment fees.

In the event the Company does not enter into a new credit facility, management believes the Company will remain in compliance with the amended covenants during 2003, however, no assurances can be provided that financial ratio covenant violations of the note purchase agreement will not occur in the future or, if such violations occur, that the note holders will not elect to pursue their contractual remedies under the note purchase agreement, including requiring the immediate repayment in full of all amounts outstanding. There can also be no assurance that the Company can secure adequate or timely replacement financing to repay its note holders in the event of an unanticipated repayment demand.

The Company entered into a security agreement dated May 13, 2002 in order to comply with the terms of the credit agreement and the note purchase agreement. The Trigger Date, as defined in the credit agreement and the note purchase agreement, occurred on March 31, 2002, requiring the Company to secure its credit facility and the senior note with its inventory, machinery and equipment, and trade receivables.

The Company believes that its current working capital, cash flows generated from future operations and available capacity remaining under its credit facility will be sufficient to meet the Company's working capital and capital expenditure requirements through March 31, 2004.

Capital expenditures in 2003 are expected to total approximately $5,118,000. The Company expects to finance these expenditures using internally generated funds and amounts available from its credit facilities. Net cash provided by investing activities for the three months ended March 31, 2003 was approximately $14,508,000, compared to net cash used totaling $2,249,000 for the three months ended March 31, 2002. Capital expenditures for the three months ended March 31, 2003 were $1,740,000, compared to $2,617,000 for the three months ended March 31, 2002. Proceeds from the repayment of leases and loans was approximately $16,203,000 for the three months ended March 31, 2003, compared to proceeds from the sale and repayment of lease portfolios of $3,874,000 for the three months ended March 31, 2002. The increase in proceeds from the repayment of leases resulted from the Company's efforts to liquidate its holdings of lease portfolios following the December 2002 decision to exit the equipmen t financing business. Since the closing of the Company's captive finance company effective December 31, 2003, it has not entered into new leasing arrangements. Expenditures for equipment on operating lease were approximately $3,874,000 for the three months ended March 31, 2003.

The following table discloses aggregate information about the Company's contractual obligations and the periods in which payments are due as of March 31, 2003:

 

(in thousands)

Payments Due by Period

Contractual Cash Obligations

Total

Less Than
1 year

2-3 Years

4-5 Years

After 5 Years

Long-term debt

 

 

 

 

 

Credit facility

$31,902

 

$31,902

 

 

Senior Secured Notes

80,000

 

10,714

$21,428

47,858

Industrial Dev. Revenue Bonds

18,700

$ 500

1,000

 

17,200

Other Notes Payable

1,028

989

18

21

 

Operating leases

5,859

2,403

2,665

572

219

Total contractual cash obligations

$137,489

$3,892

$46,299

$22,021

$65,277

Contingencies

The Company is engaged in certain pending litigation involving claims or other matters arising in the ordinary course of business. Most of these claims involve product liability or other tort claims for property damage or personal injury against which the Company is insured. As a part of its litigation management program, the Company maintains adequate general liability insurance coverage for product liability and other similar tort claims. The coverage is subject to a substantial self-insured retention under the terms of which the Company has the right to coordinate and control the management of its claims and the defense of these actions.

Management has reviewed all claims and lawsuits and, upon the advice of its litigation counsel, has made provision for any estimable losses. Notwithstanding the foregoing, the Company is unable to predict the ultimate outcome of any outstanding claims and lawsuits.

Certain customers have financed purchases of the Company's products through arrangements in which the Company is contingently liable for customer debt of approximately $13,085,000 and for residual value guarantees of approximately $1,305,000 at March 31, 2003. These obligations range from 36 to 48 months in duration.

In addition, the Company is contingently liable under letters of credit of approximately $22,091,000 primarily related to Industrial Revenue Bonds.

Risk Factors

A decrease or delay in government funding of highway construction and maintenance may cause our revenues and profits to decrease.

Many of our customers depend substantially on government funding of highway construction and maintenance and other infrastructure projects. Any decrease or delay in government funding of highway construction and maintenance and other infrastructure projects could cause our revenues and profits to decrease. Federal government funding of infrastructure projects is usually accomplished through bills, which establish funding over a multi-year period. The most recent spending bill was signed into law in June of 1998 and covers federal spending through September 30, 2003. On April 11, 2003, the House and Senate approved a non-binding budget resolution that assumes a minimum highway funding level of $218 billion for fiscal years 2004 through 2009, which would increase current funding levels. Nevertheless, this legislation may be revised in future congressional sessions and federal funding of infrastructure may be decreased in the future, especially in the event of an economic recession. I n addition, Congress could pass legislation in future sessions, which would allow for the diversion of highway funds for other national purposes or could restrict funding of infrastructure projects unless states comply with certain federal policies.

 

An increase in the price of oil or decrease in the availability of oil could reduce demand for our products.

A significant portion of our revenues relates to the sale of equipment that produces asphalt mix. A major component of asphalt is oil, and asphalt prices correlate with the price and availability of oil. A rise in the price of oil or a material decrease in the availability of oil would increase the cost of producing asphalt, which would likely decrease demand for asphalt, resulting in decreased demand for our products. This would likely cause our revenues and profits to decrease. In fact, rising gasoline, diesel fuel and liquid asphalt prices significantly increased the operating and raw material costs of our contractor and aggregate producer customers, reducing their profits and causing delays in some of their capital equipment purchases. These delays, along with the slowdown in the U.S. economy, decreased demand for several key categories of products in 2002 and could continue to affect operations during 2003.

Downturns in the general economy or the commercial construction industry may adversely affect our revenues and operating results.

General economic downturns, including downturns in the commercial construction industry, could result in a material decrease in our revenues and operating results. In fact, we believe that the economic downturn and political uncertainty during 2002 negatively affected our expected revenue growth, which has increased the competitive pricing pressure in the market. Demand for many of our products, especially in the commercial construction industry, is cyclical. Sales of our products are sensitive to the states of the U.S., foreign and regional economies in general, and in particular, changes in commercial construction spending and government infrastructure spending. In addition, many of our costs are fixed and cannot be quickly reduced in response to decreased demand. We could face a downturn in the commercial construction industry based upon a number of factors, including:

We may be unsuccessful in complying with the financial ratio covenants or other provisions of our amended credit agreement and note purchase agreement.

As of March 31, 2003, the Company was not in compliance with certain financial ratio covenants contained in the credit agreement dated as of September 10, 2001, as amended, and in the note purchase agreements dated as of September 10, 2001, as amended. The Company's banking syndicate waived the covenant violations in the amended credit agreement through an amendment effective March 31, 2003 and the Company's note holders waived covenant violations in the amended note purchase agreements through an amendment effective March 31, 2003. No assurances can be provided that financial ratio covenant violations or other violations of the credit facility or note purchase agreement will not occur in the future, or if such violations occur, that the banks and/or note holders, as the case may be, will not elect to pursue their contractual remedies under the credit facility or note purchase agreement, including requiring the immediate repayment in full of all amounts outstanding. There can also be n o assurance that the Company can secure adequate or timely replacement financing to repay its banks or note holders in the event of an unanticipated repayment demand.

Acquisitions that we have made in the past and future acquisitions involve risks that could adversely affect our future financial results.

We have completed numerous acquisitions since 1994 and may acquire additional businesses in the future. We may be unable to achieve the benefits expected to be realized from our acquisitions. In addition, we may incur additional costs and our management's attention may be diverted because of unforeseen expenses, difficulties, complications, delays and other risks inherent in acquiring businesses, including the following:

Competition could reduce revenue from our products and services and cause us to lose market share.

We currently face strong competition in product performance, price and service. Some of our national competitors have greater financial, product development and marketing resources than we have. If competition in our industry intensifies or if our current competitors enhance their products or lower their prices for competing products, we may lose sales or be required to lower the prices we charge for our products. This may reduce revenue from our products and services, lower our gross margins or cause us to lose market share. In fact, some key competitors slashed prices in 2002 in an effort to make sales as demand in our industry slowed. As a result, we experienced price erosion and lower gross margins.

As an innovative leader in the asphalt and aggregate industries, we occasionally undertake the engineering, design, manufacturing and construction of equipment systems that are new to the market. Estimating the cost of such innovative equipment can be difficult and could result in our realization of significantly reduced or negative margins on such projects.

During 2002, the Company experienced negative margins on certain large, specialized aggregate systems projects. These large contracts included both existing and innovative equipment designs, on-site construction and minimum production levels. Since it can be difficult to achieve the expected production results during the project design phase, field testing and redesign may be required during project installation, resulting in added cost. In addition, due to any number of unforeseen circumstances, which can include adverse weather conditions, projects can incur extended construction and testing delays, which can cause significant cost overruns. We may not be able to sufficiently predict the extent of such unforeseen cost overruns and may experience significant losses on specialized projects.

We may face product liability claims or other liabilities due to the nature of our business. If we are unable to obtain or maintain insurance or if our insurance does not cover liabilities, we may incur significant costs which could reduce our profitability.

We manufacture heavy machinery, which is used by our customers at excavation and construction sites and on high-traffic roads. Any defect in, or improper operation of, our equipment can result in personal injury and death, and damage to or destruction of property, any of which could cause product liability claims to be filed against us. The amount and scope of our insurance coverage may not be adequate to cover all losses or liabilities we may incur in the event of a product liability claim. We may not be able to maintain insurance of the types or at the levels we deem necessary or adequate or at rates we consider reasonable. Any liabilities not covered by insurance could reduce our profitability or have an adverse effect on our financial condition.

Due to the cyclical nature of our industry, the necessity of government highway funding and the customization of the equipment we sell, we may not be able to accurately forecast our expected quarterly results.

The Company sells equipment primarily to contractors whose demand for equipment depends greatly upon the volume of road or utility construction projects underway or to be scheduled by both government and private entities. Much of the customized equipment manufactured requires significant manufacturing lead-time and specific delivery dates, that allow the expected revenue stream to be included in the manufacturing backlog total. As a result, we may not be able to accurately forecast our expected quarterly results.

 If we become subject to increased governmental regulation, we may incur significant costs.

Our hot-mix asphalt plants contain air pollution control equipment that must comply with performance standards promulgated by the Environmental Protection Agency. These performance standards may increase in the future. Changes in these requirements could cause us to undertake costly measures to redesign or modify our equipment or otherwise adversely affect the manufacturing processes of our products. Such changes could have a material adverse effect on our operating results.

Also, due to the size and weight of some of the equipment that we manufacture, we often are required to comply with conflicting state regulations on the maximum weight transportable on highways and roads. In addition, some states regulate the operation of our component equipment, including asphalt mixing plants and soil remediation equipment, and most states regulate the accuracy of weights and measures, which affect some of the control systems that we manufacture. We may incur material costs or liabilities in connection with the regulatory requirements applicable to our business.

If we are unable to protect our proprietary technology from infringement or if our technology infringes technology owned by others, then the demand for our products may decrease or we may be forced to modify our products, which could increase our costs.

We hold numerous patents covering technology and applications related to many of our products and systems, and numerous trademarks and trade names registered with the U.S. Patent and Trademark Office and in foreign countries. Our existing or future patents or trademarks may not adequately protect us against infringements and pending patent or trademark applications may not result in issued patents or trademarks. Our patents, registered trademarks and patent applications, if any, may not be upheld if challenged, and competitors may develop similar or superior methods or products outside the protection of our patents. This could reduce demand for our products and materially decrease our revenues. If our products are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify the design of our products, change the name of our products or obtain a license for the use of some of the technologies used in our products. We may be unable to do any of the foregoing in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do so could cause us to incur additional costs or lose revenues.

Our success depends on key members of our management and other employees.

Dr. J. Don Brock, our Chairman and President, is of significant importance to our business and operations. The loss of his services may adversely affect our business. In addition, our ability to attract and retain qualified engineers, skilled manufacturing personnel and other professionals, either through direct hiring or acquisition of other businesses employing such professionals, will also be an important factor in determining our future success.

Difficulties in managing and expanding in international markets could divert management's attention from our existing operations.

In 2002, international sales represented approximately 17% of our total sales. We plan to continue to increase our presence in international markets. In connection with any increase in international sales efforts, we will need to hire, train and retain qualified personnel in countries where language, cultural or regulatory barriers may exist. Any difficulties in expanding our international sales may divert management's attention from our existing operations. In addition, international revenues are subject to the following risks:

Our quarterly operating results are likely to fluctuate, which may decrease our stock price.

Our quarterly revenues, expenses and operating results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. As a result, our operating results may fall below the expectations of securities analysts and investors in some quarters, which could result in a decrease in the market price of our common stock. The reasons our quarterly results may fluctuate include:

Period to period comparisons of such items should not be relied on as indications of future performance.

 

Our Articles of Incorporation, Bylaws, Rights Agreement and Tennessee law may inhibit a takeover, which could delay or prevent a transaction in which shareholders might receive a premium over market price for their shares.

Our charter, bylaws and Tennessee law contain provisions that may delay, deter or inhibit a future acquisition or an attempt to obtain control of Astec. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us or obtaining control of us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition or an attempt to obtain control of us include the following:

In addition, the rights of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of our preferred stock that may be issued in the future and that may be senior to the rights of holders of our common stock. On December 22, 1995, our Board of Directors approved a Shareholder Protection Rights Agreement, which provides for one preferred stock purchase right in respect of each share of our common stock. These rights become exercisable upon a person or group of affiliated persons acquiring 15% or more of our then-outstanding common stock by all persons other than an existing 15% shareholder. This Rights Agreement also could discourage bids for the shares of common stock at a premium and could have a material adverse effect on the market price of our shares.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2001.

Item 4. Controls and Procedures

Within the 90-day period prior to the date of this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure. There have been no significant changes in the Company's inte rnal controls or in other factors that could significantly affect internal controls subsequent to the date that Company management conducted its evaluation.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments in the legal proceedings previously reported by the registrant since the filing of its Annual Report on Form 10-K for the year ended December 31, 2002. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies" in Part I - Item 2 of this Report.

Item 3. Defaults Upon Senior Securities

As of March 31, 2003, the Company was in default in the performance of the leverage and fixed charge coverage ratio covenants in its secured credit facility and received a waiver for such breaches on March 31, 2003. As of March 31, 2003, the Company was also in default in the performance the leverage and fixed charge coverage ratio covenants in its senior secured notes and received a waiver for such breaches on March 31, 2003.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

Exhibit No.

Description

3.1

Restated Charter of the Company (incorporated by reference to the Company's Registration Statement on Form S-1, effective June 18, 1986, File No. 33-5348).

3.2

Articles of Amendment to the Restated Charter of the Company, effective
September 12, 1988 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 0-14714).

3.3

Articles of Amendment to the Restated Charter of the Company, effective June 8, 1989 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-14714).

3.4

Articles of Amendment to the Restated Charter of the Company, effective January 15, 1999 (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 0-14714).

3.5

Amended and Restated Bylaws of the Company, adopted March 14, 1990 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1989, File No. 0-14714).

4.1

Trust Indenture between City of Mequon and FirstStar Trust Company, as Trustee, dated as of February 1, 1994 (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-14714).

4.2

Indenture of Trust, dated April 1, 1994, by and between Grapevine Industrial Development Corporation and Bank One, Texas, NA, as Trustee (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-14714).

4.3

Shareholder Protection Rights Agreement dated December 22, 1995 (incorporated by reference to the Company's Current Report on Form 8-K dated December 22, 1995, File No. 0-14714).

10.36

Credit Agreement, dated September 10, 2001, between the Company and Astec Financial Services, Inc. as Borrowers and the Named Lenders with Bank One, NA as Agent (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, File No. 0-14714).

10.37

Note Purchase Agreement, dated September 10, 2001 between the Company and Astec Financial Services, Inc. and Names Private Institutional Investors (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, File No. 0-14714).

10.38

First Amendment Agreement, effective March 12, 2002, to Note Purchase Agreement, dated September 10, 2001, between the Company and Astec Financial Services, Inc. and Named Private Institutional Investors (incorporated by reference to the Company's Annual Report of Form 10-K for the year ended December 31, 2001, File No. 0-14714).

10.39

First Amendment to Credit Agreement, effective March 12, 2002, to Credit Agreement dated September 10, 2001, between the Company and Astec Financial Services, Inc. as Borrowers and the Named Lenders with Bank One, NA as Agent (incorporated by reference to the Company's Annual Report of Form 10-K for the year ended December 31, 2001, File No. 0-14714).

10.40

Amendment No. 2 to Credit Agreement and Waiver dated May 13, 2002, by and among Astec Industries, Inc. and Astec Financial Services, Inc. and Bank One, NA as Agent (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, File No. 0-14714).

10.41

Second Amendment Agreement, effective April 1, 2002, to Note Purchase Agreement dated September 10, 2001, between the Company and Astec Financial Services, Inc. and Named Private Institutional Investors (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, File No. 0-14714).

10.42

Security Agreement dated May 13, 2002 by and among Astec Industries, Inc. and Astec Financial Services, Inc. and the other and Bank One, NA as Agent (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, File No. 0-14714).

10.43

Third Amendment Agreement, dated August 14, 2002, to Note Purchase Agreements dated September 10, 2001 and 7.56% Secured Notes due September 10, 2011, between the Company and Astec Financial Services, Inc. and Names Private Institutional Investors (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-14714).

10.44

Amendment No. 3 to Credit Agreement and Waiver dated August 7, 2002 by and among Astec Industries, Inc. and Astec Financial Services, Inc. and together with Bank One, NA, individually and as agent, and the other financial institutions (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-14714).

10.45

Forbearance Agreement dated October 24, 2002 by and among Astec Industries, Inc. and Astec Financial Services, Inc. and Bank One, NA, individually and as Agent and the other financial institutions (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 0-14714).

10.46

Amendment No. 4 to Credit Agreement and Waiver dated November 14, 2002, by and among Astec Industries, Inc. and Astec Financial Services, Inc. and together with Bank One, NA, individually and as agent, and for other financial institutions (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 0-14714).

10.47

Fourth Amendment Agreement, dated November 14, 2002, to Note Purchase Agreements dated September 10, 2001 and 7.56% Secured Notes due September 10, 2011, between the Company and Astec Financial Services, Inc. and Names Private Institutional Investors (incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, File No. 0-14714).

10.48

Amendment Agreement, effective March 31, 2003, to Note Purchase Agreements, dated September 10, 2001, between the Company and Astec Financial Services, Inc. and Named Private Institutional Investors (incorporated by reference to the Company's Annual Report of Form 10-K for the year ended December 31, 2002, File No. 0-14714).

10.49

Amendment, effective March 31, 2003, to Credit Agreement, dated September 10, 2001, between the Company and Astec Financial Services, Inc., as Borrowers and the Named Lenders with General Electric Capital Corporation, as Agent (incorporated by reference to the Company's Annual Report of Form 10-K for the year ended December 31, 2002, File No. 0-14714).

99.1

Certification of Chief Financial Officer of Astec Industries, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002

99.2

Certification of Chief Executive Officer of Astec Industries, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002

(b)

Reports on Form 8-K:

No reports on Form 8-K were filed during the quarter ended March 31, 2003.

______________________

 

The Exhibits are numbered in accordance with Item 601 of Regulation S-K. Inapplicable Exhibits are not included in the list.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ASTEC INDUSTRIES, INC.

(Registrant)

 

Date 5/13/2003

/s/ J. Don Brock

 

J. Don Brock

 

Chairman of the Board and President

 

 

 

Date 5/13/2003

/s/ F. McKamy Hall

 

F. McKamy Hall

 

Vice President, Chief Financial Officer and Treasurer

 

 

 

CERTIFICATION

I, Dr. J. Don Brock, CEO, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Astec Industries, Inc.;
  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
  4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
    1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
    2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
    3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
  5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
    1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
    2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
  6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date 5/13/2003

/s/ J. Don Brock

 

J. Don Brock

 

Chairman of the Board and President

 

 

CERTIFICATION

I, F. McKamy Hall, CFO, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Astec Industries, Inc.;
  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
  4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
    1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
    2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
    3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
  5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
    1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
    2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
  6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 

Date 5/13/2003

/s/ F. McKamy Hall

 

F. McKamy Hall

 

Vice President, Chief Financial Officer and Treasurer